Zee Medical Distributor Assoc. v. Zee Medical, Inc., C 98-2178 CRB.

• Decision Date: 03 November 1998
• Docket Number: No. C 98-2178 CRB.,C 98-2178 CRB.
• Citation: 23 F.Supp.2d 1151
• Parties: ZEE MEDICAL DISTRIBUTOR ASSOCIATION, INC., A Nevada Corporation, Plaintiff, v. ZEE MEDICAL, INC., A California Corporation, Defendant.
• Court: U.S. District Court — Northern District of California

23 F.Supp.2d 1151

ZEE MEDICAL DISTRIBUTOR ASSOCIATION, INC., A Nevada Corporation, Plaintiff, v. ZEE MEDICAL, INC., A California Corporation, Defendant.

No. C 98-2178 CRB.

United States District Court, N.D. California.

November 3, 1998.

Alan P. Hillman, Heuberger, Quinn, Gielen, Ruben, & Gibber, Baltimore, MD, Ralph J. Sutton, Bartko, Zankel, Tarrant & Miller, San Francisco, CA, for Plaintiff.

J. Thomas Rosch, Latham & Watkins, San Francisco, CA, for Defendant.

ORDER

BREYER, District Judge.

INTRODUCTION

Plaintiff Zee Medical Distributor Association ("ZMDA") is composed of distributorship companies located throughout the United States. It brings this action against defendant Zee Medical ("Zee") to assert the rights of its members in a contract dispute. Specifically, plaintiff seeks declaratory judgment on the question whether Zee Medical's contracts with its various distributors are terminable at will with reasonable notice, or terminable only for cause. Although some aspects of each ZMDA member's individual contract with Zee may differ, the contractual language in dispute here is identical for all contracts.

Because this is purely a question of state law, the parties justify their presence in federal court on diversity grounds. ZMDA's complaint alleges that it is a citizen of Nevada for diversity purposes, and that Zee is a citizen of California. Some of ZMDA's members are citizens of California as well, but they are not named parties in the suit.

On September 18, 1998, the parties were scheduled to appear before this Court to argue the merits of the case on summary judgment. However, before the scheduled hearing, the Court discovered two potential procedural defects in the case. First, the question arose whether ZMDA is a real party in interest in the lawsuit as required by Federal Rule of Civil Procedure 17. Rule 17(b) provides, essentially, that an association may only sue to assert the interests of its members if it is authorized to do so under the law of the state in which the district court sits, and the parties' briefs did not indicate whether such authority exists in the present case. Second, even if an association has state law authority to bring suit, the court may still be required to consider the citizenship of the association's members for the purpose of assessing diversity jurisdiction. Because ZMDA conceded that some of its members were California citizens, the question arose whether complete diversity was lacking. Accordingly, the Court ordered the parties to submit briefs on these two questions.

The parties have now submitted their briefs, and both maintain that this suit may properly be brought in federal court. Furthermore, in an effort to cure any defect in subject matter jurisdiction that may exist defendant has agreed not to object if plaintiff amends its complaint to specify that the claims of ZMDA's California distributors are not part of the case. In light of this collaborative effort by the parties to achieve federal jurisdiction, there are now three procedural questions before the Court:

1. Is plaintiff ZMDA a real party in interest in this dispute, such that it may bring suit on behalf of its members without violating Federal Rule of Civil Procedure 17?

2. If plaintiff may properly be considered a real party in interest, does the fact that its membership includes California corporations destroy complete diversity, thus depriving the Court of subject matter jurisdiction?

3. If the involvement of plaintiff's California members destroys complete diversity, may the parties cure this defect by stipulating that the rights of the California members will not be decided in the case?

I. IS ZMDA A REAL PARTY IN INTEREST?

As mentioned above, ZMDA itself has no contractual dispute with Zee. Rather, it seeks declaratory relief on behalf of its individual members, who formed the association in 1997. As such, the question arises whether ZMDA is a real party in interest in the lawsuit.

Federal Rule of Civil Procedure 17(a) provides that "[e]very action shall be prosecuted in the name of the real party in interest." Rule 17(b) goes on to specify the following guidelines for determining whether a party has the capacity to sue or be sued as a real party in interest:

The capacity of an individual, other than one acting in a representative capacity, to sue or be sued shall be determined by the law of the individual's domicile. The capacity of a corporation to sue or be sued shall be determined by the law under which it was organized. In all other cases, capacity to sue or be sued shall be determined by the law of the state in which the district court is held, except (1) that a partnership or other unincorporated association, which has no such capacity by the law of such state, may sue or be sued in its common name for the purpose of enforcing for or against it a substantive right existing under the Constitution or laws of the United States ...

It appears at first glance that because ZMDA is a corporation, the second sentence of rule 17(b) would apply, meaning that the Court must look to Nevada law to determine if plaintiff has the capacity to sue for declaratory relief on behalf of its members. However, federal courts have ruled that this sentence applies only when a corporation is suing to assert its own rights. When a party sues in a representative capacity, the third sentence of rule 17(b) applies, regardless of whether the party is a corporation or an individual. See, e.g., Moore v. Matthew's Book Co., 597 F.2d 645 (8th Cir. 1979); Charles A. Wright, Arthur R. Miller and Mary Kay Kane, Federal Practice and Procedure, Vol. 6A, § 1561.¹

Thus, under rule 17(b), the capacity of a corporation to sue on behalf of its members is determined by the law of the state in which the federal district court sits. As such, the Court must determine whether California law authorizes an association such as ZMDA to file suit on behalf of its members to seek a declaratory judgment regarding the application of state law to the terms of a distributorship contract.

As a preliminary matter, it must be emphasized that this inquiry is distinct from the question whether ZMDA satisfies the standing requirement that emanates from Article III of the U.S. Constitution. As the Supreme Court explained in Hunt v. Washington State Apple Advertising Comm'n., 432 U.S. 333, 343, 97 S.Ct. 2434, 53 L.Ed.2d 383 (1977), an association that seeks to assert the rights of its members satisfies the jurisdictional requirements of Article III when: 1) its members would otherwise have standing to sue in their own right; 2) the interests it seeks to protect are germane to the organization's purpose; and 3) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit. There is no doubt that plaintiff meets these three elements here. However, this conclusion does not obviate the need to determine whether plaintiff satisfies the requirements of rule 17.²

It is not clear whether California law authorizes ZMDA to bring suit on behalf of its members in this case. The general thrust of the case law is that an association may sue in a representative capacity to assert a "public interest," but there is some doubt regarding an association's authority to sue to assert the "private" interests of its members.

For example, in Residents of Beverly Glen, Inc. v. City of Los Angeles, 34 Cal.App.3d 117, 109 Cal.Rptr. 724 (1973), an appellate court held that a homeowners' association had authority to sue to challenge governmental action because its complaint alleged that its members lived in the affected area of the challenged project and would suffer injury if the project was to proceed. In so holding, the court emphasized the "public nature" of the issue, noting that an association's right to sue is greatly relaxed where the question is of public interest:

In recent years there has been a marked accommodation of formerly strict procedural requirements of standing to sue and even of capacity to sue where matters relating to the social and economic realities of present-day organization of society are concerned.

Residents of Beverly Glen, 34 Cal.App.3d at 122, 109 Cal.Rptr. 724 (internal citations omitted). See also Citizens Against Forced Annexation v. County of Santa Clara, 153 Cal.App.3d 89, 96, 200 Cal.Rptr. 166 (1984) (holding that an association composed of taxpayers and residents had authority to sue in a representative capacity because it was asserting the "public right" to have agencies comply with proper annexation procedures).

By implication, these cases suggest that an association such as ZMDA, which seeks to assert the private contractual rights of its members, would not have authority to sue in a representative capacity. Other California courts, however, have been more lenient in terms of their willingness to grant an association this authority. For example, in Twain Harte Homeowners Assn. v. Patterson, 193 Cal.App.3d 184, 239 Cal.Rptr. 316 (1987), a homeowners' association brought an action to quiet title and to obtain declaratory relief with respect to a recreational easement. The court held that the organization had capacity to sue simply on the grounds that there was an adequate community of interests between the association and its members. Id. at 187, 239 Cal.Rptr. 316. And, in Tenants Association of Park Santa Anita v. Southers, 222 Cal.App.3d 1293, 1304, 272 Cal.Rptr. 361 (1990), a court allowed an association composed of mobile home tenants to bring suit against the owners of the mobile home park for improperly attempting to force the tenants out of their homes, ruling that the association had proper authority to sue based on "considerations of necessity, convenience and justice."

In light of the foregoing, it is unclear whether California law provides ZMDA with the authority to bring suit here. However, for the purposes of this opinion, the Court will assume,...